When most people think about putting a down payment on a home, 20% comes to mind. However that doesn’t mean that you need 20% down to become a new homeowner. Every lender is different and depending on your financial circumstances you could qualify for a mortgage without having to fork over all that cash.
The Return of 3% Down
This Monday, December 8th 2014, Fannie Mae officially announced it will offer 97% LTV financing to help homebuyers, who lack the financial resources to qualify for a larger down payment, acquire a mortgage loan.
That means homebuyers once again have the option to put as little as 3% down in order to qualify for conventional financing. Previously an FHA loan was the only way to get such a low down payment. The program is for first-time homebuyers only however if two people are buying a home, only one needs to be a first-time buyer. In addition, the standard Fannie Mae standard underwriting guidelines apply.
More program specifics:
- Must be a first-time buyer. First-time buyers are considered those who haven’t owned a home in the past 3 years, and Freddie Mac is also opening these mortgages to repeat low- and moderate-income buyers.
- Freddie Mac will require homeownership counseling for first-time buyers and will provide no-cash-out mortgage financing.
- Must have a credit score of at least 620
- Fannie Mae will start backing loans as soon as December 13th and Freddie Mac will start in March of 2015.
Private Mortgage Insurance
The benefit of purchasing a conventional mortgage is the fact that you can drop the PMI once you’ve reached an equity target, usually set at 20-22%. When you purchase an FHA loan the only way to drop the PM is with a refinance or by selling your home.
How down payment affects your monthly payments
The more money you put down, the lower your monthly payments will be. If you buy a home for $300,000 with 3 percent down ($9,000) with a fixed rate 4 percent interest mortgage, your monthly payments will be about $1,994. If you up the down payment to 5 percent (15,000) your monthly payment drops to just $1,908.
However, consider the fact that interest rates also have a significant impact. If you raise your interest rate by just one point up to a fixed rate 5 percent interest but keep the 3 percent down payment on the $300,000 home, you will be paying $2,166 a month.
While a larger monthly payment can save you money, taking advantage of low mortgage rates can also save you some significant dough.
So, Is 3% Right For You?
These low down payment programs are targeting buyers with good credit but little cash. Critics say this is the risky lending we saw a couple of years back that led to the mortgage meltdown, but Fannie and Freddie disagree. Executives say the programs have proper safeguards to ward against another financial crisis.
Loans with 3% down will be subject to strong underwriting standards to ensure sound lending practices. We suggest you sit down with a financial professional to figure out what the best solution is for you.
If you’d like to start reviewing your options, reach out to a First Team agent today to help you get started. You can search for an agent online or leave the searching to us.
Email us at clientservices@firstteam.com
Call us at 888-870-1142
